8 Reasons You Should Definitely Enroll in a DCFSA.
by Kaitlyn Ranze
Sixty-seven percent of companies offer dependent care flexible spending accounts (FSAs), yet many eligible employees fail to take advantage of this benefit during open enrollment.
This article explains what a dependent care FSA is, how it works and who should consider enrolling in one.
While dependent care FSAs are structured like health FSAs, dependent care FSAs allow you to pay dependent care expenses (such as daycare and after-school programs) while health FSAs typically only cover medical expenses. Both of these accounts allow you to pay for eligible expenses using tax-free funds.
What exactly are dependent care expenses?
Dependent care expenses are any costs incurred while paying for the care of an eligible dependent. An eligible dependent includes your child under age 13, your dependent spouse who needs dependent care, and your dependent parent who needs regular aid or supervision due to physical or mental incapacity.
What are qualified dependent care expenses?
While you can’t use the funds to pay for a babysitter on vacation or during date night, there are other eligible expenses that include (but aren’t limited to):
- Adult daycare centers
- Au pairs and nannies for children
- Work-related babysitting
- Before or after-school programs
- In-home and center-based daycares for children
- Work-related custodial elder care
- Nursery and preschool school
- Registration fees for eligible care expenses
- Senior daycare
- Summer day camp
- Transportation of the dependent to or from a location where care is provided
The best rule of thumb to follow is that if your dependents are receiving care that allows you to work, it’s an eligible expense.
Dependent care spending on service animals
If your pet is actually an emotional support or service animal, then, according to the IRS, you can use those funds to pay for expenses that help the animal do its job:
“…the costs of buying, training, and maintaining a guide dog or other service animal to assist a visually impaired or hearing disabled person, or a person with other physical disabilities. In general, this includes any costs, such as food, grooming, and veterinary care, incurred in maintaining the health and vitality of the service animal so that it may perform its duties.”
How does a dependent care FSA work?
A dependent care FSA (DCSFSA) lets you set aside pre-tax dollars from your paycheck to pay for dependent care expenses up to an IRS-authorized limit (temporarily $10,000 in 2021 due to the American Rescue Act). Unlike an HSA, which gradually builds a balance over time, your employer deposits a total amount into your FSA at the beginning of the year. This grants you immediate access to the funds while you contribute toward it spread across your paychecks throughout the year.
There are a couple of downsides to this.
Your dependent care FSA is set up using your anticipated dependent care expenses. This means you can’t contribute more than the total dependent care expense you expect to have for the upcoming year. Also, if you don’t use the funds in your DCFSA, you lose them. (Specifically, the unused funds from a dependent care FSA are turned over to your employer.) Lastly, if your dependent care expenses turn out to be less than expected, the difference is taxable income and must be included as such on your tax return.
Why should you care about minimizing your taxes?
You’re reducing your overall tax bill and increasing your overall take-home pay. This means you get to keep more money and spend it on things you want (or are already pay like childcare).
How dependent care FSAs affect dependent care tax credit
The dependent care FSA might offer significant savings beyond just pre-tax contributions. If your dependent daycare costs add up to more than the annual contribution limit, then you might be able to claim a dependent care tax credit. That’s right: You can get a dependent daycare tax credit even if your dependent doesn’t qualify for the dependent daycare rebate. (A tax credit lowers the amount of income tax that you would otherwise owe.)
As long as dependent care expenses add up to $3,000 or more, you should be able to claim the dependent care tax credit when filing your federal income taxes. This isn’t just limited to dependent children, either: If an elderly family member needs daycare and qualifies under the criteria, then you could still use this tax credit for them.
Who should consider enrolling in a dependent care FSA?
You should enroll in a dependent care FSA if both of these apply: 1) You have dependent care expenses and 2) your dependent care expenses are more than the dependent care FSA contribution limit. Remember, unclaimed dependent care FSA money is forfeited to your employer.
The key to successfully using either type of FSA is planning ahead so that you have all of the information needed before open enrollment season rolls around. For instance, if you know that you’ll be getting married within the year, then now is the time to make sure your dependent care FSA is still available. While there are some general rules that apply to most cases for eligible expenses, there might also be special considerations for your specific situation.
8 Reasons you should Enroll in a Dependent Care FSA
1) Dependent Care FSAs help parents keep their lifestyle intact
You may have heard about dependent care FSAs or FSAs in general while you were at the office, but brushed it off because you’re child-free. But dependent care FSAs do provide savings for non-parents too, so take advantage of open enrollment season to see how much money you could save on daycare expenses BEFORE you have kids.
2) Dependent Care FSAs can help cover dependent care expenses for your pets
Seriously. If you have dependent care expenses that aren’t covered by your regular budget, dependent care FSAs can potentially be used to cover some of those costs too.
3) Dependent Care FSAs reduce the risk of a dependent care penalty
One thing that keeps people from planning ahead is that they’re not sure they’ll face a dependent care penalty. We hate to break it to you, but dependent care penalties are real, and dependent care FSAs are the best way to avoid dependent care penalties.
According to the IRS, dependent care expenses must be “reasonable.” If you’re not diligent about how much dependent care expenses you claim through your dependent care FSA, you could face a dependent care penalty at tax time. For help in filing dependent care expenses, the IRS offers a dependent care tax calculator.
4) Dependent Care FSAs make you eligible for dependent care benefits from your employer too
Many companies offer dependent care savings programs as a benefit to their employees. If you have dependent care expenses and aren’t sure of the costs involved, check with your HR representative to see if your dependent care benefits extend to dependent care FSAs.
5) Dependent Care FSAs can be used for dependent care on a flexible schedule, not just set hours of the day
You may have heard that dependent care FSAs can only be used during traditional business hours – 9am-5pm on weekdays. But that’s simply not true. Dependent care FSAs can be used for dependent care expenses on a flexible schedule, which means they’re available to cover dependent care expenses outside of the 9-to-5 workday.
6) Dependent Care FSAs are easy to enroll in
Depending on your dependent care provider, dependent care FSA enrollment may only take a few minutes. The dependent care provider will have you fill out a form with your dependent care expenses to see how much money you could save before open enrollment ends. If the dependent care FSA passes the savings test, you’re done. Open enrollment has never been easier!
7) Dependent Care FSAs are easy to use
Depending on your dependent care provider, dependent care FSAs can be used to pay dependent care expenses directly from your dependent care FSA account.
8) Dependent Care FSAs make tax season easier
Whether or not you realize it yet, dependent care FSAs have a lot of benefits that extend beyond dependent care savings. You see, when you enroll in dependent care FSAs, you’ll be able to file dependent care expenses on your taxes with ease. While you should still keep the receipts, your dependent care expense is already right there in front of you if you’ve only used the separate DCFSA for eligible expenses.
Now that you’re in the know, check with your company’s human resources department to see if dependent care FSA is offered.
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